George Osborne and David Cameron often spin the Conservative party line that the government has reduced the deficit by 25%, a significant effort they say, considering the deficit inherited from new Labour in mid 2009. Really? At what price can we say this debt reduction has come at?
We can argue all day which statistics, tables or measures best represent the economic outlook and historical performance. Seemingly, there are many ways to look at the current situation positively or negatively if you want, depending on which figures you select to use.
I choose to take a simple measure. One which is easy to understand and provides a useful view on liquidity. Its the percentage of national debt to the Gross Domestic Product. This measures the ratio of ‘national income’ versus what the nation owes. The greater the GDP growth and the lower the national debt, the better the economy is performing. Managing the economy is a dynamic balance between the two.
Using data provided by Mark McCormick in the Guardian, the National debt, has changed as a percent of GDP over a period of the past fourteen and a half years, from 40.3% (Jan 1998) to 66.1% (Aug 2012) – excluding financial interventions. Further, I have summarised this percentage by Chancellor, as follows:
1. Gordon Brown: @start: May, 1997 = 40.3% [Data only available from Jan, 2008] ; @end: Jun, 2007 = 36.5%; Months: 114; Change = -3.8%; Monthly avg = 33.8%
2. Alistair Campbell: @start: Jul, 2007 = 35.4%; @end: Apr, 2010 = 52.7%; Months: 34; Change = +17.3%; Avg = 42.1%
3. George Osborne: @start: May, 2010 = 53.4%; @end: Aug, 2012 = 66.1%; Months: 28; Change = +12.7%; Avg = 60.8%
Gordon Brown saw a drop in the debt to GDP ratio of 3.8% and both Alistair Campbell and George Osborne watched a rise of 17.3% and 12.7% respectively. In the twenty eight months that George Osborne has been Chancellor, a budget surplus was achieved in five of those months, a surplus totalling £35bn. The deficit achieved over the same period was £182bn, leaving us £147bn more in debt than when he took office.
We are told that the deficit is the difference between tax collections and government expenditure, calculated monthly. Net borrowing is said to be the deficit figure that includes investment spending. The total liability of what the country owes at a point in time, the national debt, is different. It is the accumulated amounts of monthly surpluses and deficits. In the past four years, Mervyn King has pumped £375bn into the economy through quantitative easing, of which £75bn may be attributed to Mr. Darling and £300bn to Mr. Osborne. Hearing experts say how much this printing of new money helped the economy to grow is rare indeed.
Messrs. Cameron and Osborne are saying that the Conservatives have done great work in the reducing public deficit by 25%. Nicholas Wapshott, says that the net public debt is £995bn or 63.1 percent of GDP. (maybe excluding financial interventions?) So, 25% added on to that is around £247bn. Where did this Government money come from, austerity cuts and QE? If you add the increase in liquidity from the £147bn deficit borrowings and £300bn from QE during Osborne’s tenure, we effectively then have ‘very roughly’ a £200bn liquidity injection into the economy, notwithstanding the ‘leads and lags’ in cuts, tax receipts and gross overspending. Despite this injection, we have recessionary conditions.
Why are we not surprised then that there is no economic growth? Our leaders are seemingly roundtripping money (robbing Peter to pay Paul) and trying to disguise it as growth stimulus and sensible debt reduction. Economic growth comes from sales or purchases, as a result of demand. The government can help to derive demand by keeping producer inflation and the cost of capital low. It may help with constructive government expenditure and by stimulating exports by keeping the cost of the pound low. Finally, government can provide capital and incentives for existing and new businesses to grow their order books.
With world markets in turmoil, only the clever and agile few are able to grow and recover their economies. The UK must be one of these – not by increasing inflation through QE, paying the jobless to do nothing, reducing government spending through harsh austerity or taking years to provide capital for business marketing and production.
No credit is due yet to the Conservatives and their ingratiating spin must surely be reflected in the polls. We want to see real growth, as reflected in a significant drop in the percentage of national debt to the Gross Domestic Product ratio. Thirty percent would do.
What do you think? Let us know below.